Years ago, I found myself sitting in law school in Moot Court wearing an oversized itchy blue suit. It was a horrible experience. In a desperate attempt to avoid anything like that in the future I enrolled in a tax course. I loved it. I signed up for another. Before I knew it, in addition to my JD, I had a LL.M Taxation. I needed only to don my cape…. taxgirl® was born. Today, I live and work in Philadelphia, PA, one of the best cities in the world (I can't even complain about the sports teams these days). I landed in the City of Brotherly Love by way of Temple University School of Law. While at law school, I interned at the estates attorney division of the IRS. At IRS, I participated in the review and audit of federal estate tax returns. I even took the lead on a successful audit. At audit, opposing counsel read my report, looked at his file and said, “Gentlemen, she’s exactly right.” I nearly fainted. It was a short jump from there to practicing, teaching, writing and breathing tax.

It sounds like the beginning of a bad joke. But really, it was the beginning of a series of bad events.

Earlier this week, Pastor Alois Bell of Word Deliverance Ministries (who, and I’m not kidding, is liberally referred to as “Prophetess” on the web) and nine other diners – five of them children – went out to a St. Louis Applebee’s for a post-service meal. As is the rule at Applebee’s, a brand of Glendale, CA‘s DineEquity, Inc., an automatic service charge of 18% (known commonly as an “autograt”) was charged due to the size of the party.

Bell apparently objected to the charge, which I get. I happen to consider those automatic charges a little obnoxious but I understand the concept, so I oblige. Depending on the service and the percentage of the autograt, I generally add a bit more onto the receipt. I know it can be pretty difficult dealing with the public. Especially when they’re hungry. And cranky. And throw kids into the mix? As someone who “waits” on my own kids every night of the week, I think servers should get a high five and a tip. But that’s just me.

But Pastor Bell objected to the tip. And rather than simply cross out the amount and go on her way – or better yet, talk to the manager – Bell decided to be snarky. And rude. And (insert your own word here).

She crossed the tip off of the bill and hand wrote a little note: I give God 10% why do you get 18[?].

Nice, huh?

It gets better. She even went to the trouble of writing in the word “Pastor” on the receipt – apparently, just to make sure that the server knew that she was really, really a good person and really did give 10% to God.

And it caused a bit of a stir. So much of a stir, in fact, that the pastor complained to the Applebee’s. The server who posted the receipt, Chelsea Welch, was eventually fired.

In the midst of all of the terrible publicity, Pastor Bell apologized via The Smoking Gun, claiming that “[m]y heart is really broken.” (Pastor Bell also claims that she left cash on the table worth just over 17% of the bill but that seems at odds with the tenor of her note).

And maybe she is really sorry. But her behavior from start to finish was pretty awful. There were ten people in that party. Ten. Five adults and five children. That’s a lot of work.

Whether you agree with the concept of the autograt or not, you don’t take out your aggravation on the server. If you don’t agree with the tip, take it up with the manager. Or don’t eat at a place that charges an autograt – it’s easy enough to figure it out since most restaurants put that kind of information right on the menu.

While Bell’s behavior might have brought her attention for all of the wrong reasons, her timing couldn’t have been better for the IRS. Revenue Ruling 2012-18, which was published on June 25, 2012, just went into effect on January 1, 2013. The ruling “provides guidance for employers and employees… regarding taxes imposed on tips…including information on the difference between tips and service charges.” In other words, the ruling is intended to address the fuzzy area of when a tip is really a tip. Tops on the list for confusion is the controversial autograt.

As a customer, you probably consider any amount – not counting sales tax – which is not compensation for your food and drink to be a tip. And chances are, your server does, too. The IRS, however, has a different perspective.

Revenue Ruling 2012-18 clarifies that the IRS believes a tip to be what you and I would leave our server in addition to the bill. An amount that is calculated for you is considered a service charge. For tax reasons, there’s a big difference. So what exactly is the difference? The IRS says that if any of these criteria aren’t met, it’s not a tip, it’s a service charge:

The payment must be made free from compulsion;

The customer must have the unrestricted right to determine the amount;

The payment should not be the subject of negotiation or dictated by employer policy; and

Generally, the customer has the right to determine who receives the payment.

So those fixed charges for catering? Service charge. Autograt? Service charge. The extra $5 you leave on the table after your dinner? Tip.

How does this affect your bottom line? It doesn’t. But it does have a huge effect on the bottom line of the restaurant and the server.

For one, service charges are considered payable to the restaurant, not directly to the server. This means that restaurants must include this amount in their revenue totals for tax purposes. The amount is also subject to sales tax. Tips are generally not included in those amounts.

Not so great on the restaurant side.

So great for the servers, right? Not so much. Autograts and service charges are, for tax purposes, now to be classed as wages. That means that they can, in theory, be retained until payday; in contrast, most tips are “cashed out” on a daily or weekly basis. Since service charges are considered revenue to the restaurant – and not the server – a restaurant could opt not to pay the full amount, or even any amount related to the service, directly to the server; if that happens, the server must be paid at least minimum wage since he or she is not working for “tips” at that point and those service charges won’t necessarily end up in his or her pocket. And, of course, all payments to servers classified as wages – and not tips – would be subject to immediate withholding and payroll taxes (as opposed to self-reporting at tax time).

And here’s where Pastor Bell and the IRS intersect to make life tough for servers. The imposition of the service charge on that receipt makes it clear that the server could be paid minimum wage (depending on his or her other customers), and not issued the service charge at all, despite serving a table of ten. The restaurant likely figures how much to pay as a wage based on revenue – which now includes service charges. If customers like Pastor Bell routinely ignore service charges (which, so far as the IRS is concerned is mandatory and not discretionary), lower revenues could translate to lower wages for servers. Even more immediately, if the restaurant shares service charges among all employees, a common practice strengthened by this ruling, all of the servers would be cut out of a piece of the pie because of this sort of behavior.

The goal is clearly to simplify reporting and reduce tax fraud – which, let’s face it, runs rampant in the restaurant industry – the stories I could tell… But I think it does the opposite. Including tips on the receipt makes it more likely – not less likely – that those amounts will be reported to the IRS. Making the tax consequences more tricky and especially attributing those amounts to the restaurant as revenue and adding an additional payroll tax component to employers is likely to discourage restaurants from adding the service charges in the first place – thus encouraging restaurants to avoid the practice altogether.

That said, the ruling has only been in effect for a few weeks so it will be interesting to see how it finally shakes out. It does raise some interesting questions: I’d be interested to hear your responses. How do you tip? Cash or credit card? And how do you feel about those autograts?

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A local restaurant in my town does something interesting. They put a little note that the tip is shared among all staff and give you an option “hated it, liked it, loved it” with 10% 15% and 20% next to the words so you can circle the one you want. Next to the percentages it shows you how much money it would cost to tip each amount.

Under all of that is a normal tip line where you can tip a custom amount.

According to my regular server, since they’ve started using this system more people have been regularly tipping 20% since they know it’s shared and how little it costs them to benefit their servers.

I like the system because it simplifies it for the customers who aren’t very math savvy, but I can still tip my normal 30+% (I love this place, they treat me well).

A restaurant should not seat people and charge them money for food if they cannot serve them.

“Autograts” have become another form in Taxation. In California we pay 9.75% then another 18% in taxes. Things like that keep my family eating at home yet you see no articles talking about my hard earned wages.

Great article kelly. A couple of things that I believe should be pointed out. First off this so called Pastor said she gives 10% but in all actuality if we really think about it, she had dedicated her life to church/religion, so therefore I believe that she has probably given more than 10% overall, probably more than 18% to. Also do we know what she ordered? I am partially guessing it will be some sort of ironic food, that a joke will be able to be made out of.

I dine weekly with a group, usually ten to twelve people. We all dislike the autograt but live with it because we must. We think 18 percent is pushy, with 15 percent being the norm for average service in our minds. That said, we all leave something extra to bring it up to the 20-25 percent range if the servicer goes beyond usual service, which happens much more often than not. I used to put the tip on the card along with the bill, but after the last time my card got compromised, I prefer to pay the bill and the tip in cash.

I really don’t like sales tax levied against what is supposed to be a gift to the staff.

We kid around a lot and if the server seems inclined to join in, the tip goes up. If the server remembers what we drink from the last visit, the tip goes up more and we get the server’s name and we ask for him or her when we call ahead next time.

15 percent is considered so-so service where I’m from. 20% is excellent service, so making 18% the auto-grat is pretty typical in my opinion. My restaurant holds standards a bit *too* high though. They think 20% is too low and any server making only 20% should be considered for less tables or less hours. I guess it depends on where you go. Basically, if I wait on you and work extremely hard and you leave me 15%, I’m going to assume I did something wrong.

You said in your article you would condone someone crossing out the service charge and going on their way. That’s a form of stealing. You say you find the service charge obnoxious, but you know what? The minimum wage for servers is 2 bucks 50 an hour. Without it, servers wouldn’t eat like you can. You can afford to eat and it’s only a few dollars difference, so keep your mouth shut, and please don’t ever encourage other people to refuse to pay the service charge, as there’s a saying: If everyone picked the flowers in the garden, there’d soon be none left. In countries that don’t have a service charge, servers get paid a decent wage they can live on. As for what I’d say to the pastor: Jesus said to give sacrificially, so she should have paid her fair share. Moreover, if the service was good, she should have given twenty or twenty five percent as an example to her elders and congregation. Shame.

Marion, to be clear, I didn’t suggest that I would condone such behavior. Since the pastor had clearly made up her mind that she didn’t want to pay the service charge as stated on the bill, I figured there were much better ways to handle a refusal to pay. I said, about Bell’s particular behavior, “[a]nd rather than simply cross out the amount and go on her way – or better yet, talk to the manager – Bell decided to be snarky.” If she wasn’t going to pay, my point was simply that she had other options that didn’t involve directing rude comments to the server or invoking the name of God.

If we were paid a fair wage, the cost of your food and drink would skyrocket. Restaurants keep their costs low by paying us $2.13/hour and making us pay the rest of the help – the hosts/bussers/part of the bartender’s tips, etc. I host and I serve so I see both sides of the coin.